Kakeibo- Japanese method of Budgeting
Simple Finance Weekly Newsletter (Week 15)
There are various Japanese concepts like Ikigai (finding your purpose, your calling in life), Kaizen (continuous incremental improvement) which have an indirect bearing on personal finance. For example, you will need to find your Ikigai if you decide to retire early or if you want to turn your passion into livelihood and forgo the 9 to 5 job. Similarly, you will need Kaizen to perfect your personal finance journey.
Kakeibo is also a Japanese method which has a fairly direct relation with personal finance since it is a method of managing your monthly budget.
If you are an expert in managing your monthly budget or someone who at the end of the month can not figure out where all your salary has gone, in either case you must know this method.
What is it?
Kakeibo basically means a Household ledger, it is a physical journal. The concept first appeared in 1904 in a magazine. Since this involves using a diary and a pen, you do not need to go for various apps that might require access to your personal data like SMS and Emails to gather your spending pattern.
Essentially four simple questions are needed to be answered in a sequence
1. How much money do you have available? You will arrive at the answer after subtracting all the essential expenses (Needs) from all sources of income- Salary, rental income, business/freelance income, side hustle etc
2. How much would you like to save? Here you have to be ambitious but realistic.
(Kakeibo method has really hit the nail by removing the savings portion in the beginning itself, earlier we were taught that Income-Expenditure=savings. Going a step beyond would be to keeping aside the Savings portion even prior to subtracting the essential expenses as well, thereby arriving at the formula Income-Savings=expenditure)
3. How much are you spending? Needs, Wants, Culture, Unexpected.
4. How can you improve? This question compels you to be mindful of your spending and look out for ways to cut down on expenses. At the same time through the mindfulness you will be able to find out the activities which really bring you joy. You can use Kaizen method of small, incremental but continuous effort to improve next week/month.
There are four categories in Kakeibo- Needs, Wants, Culture, Unexpected.
The exercise of trying to jot down each and every component above four categories will help you arrive at a ball park figure of your expenses in a month.
For Example,
Needs can be rent, groceries, EMIs, utility bills etc which are absolutely necessary.
Wants are eating out, Netflix/OTT subscription, new clothes, phone etc.
Culture would include books, museums, socializing, religious activities etc. Though there should not a cap on buying books that you are actually going to read, most line items here can be clubbed with Wants or Unexpected.
Unexpected spends can be equivalent to Emergency Fund (Seen in earlier article)
You can answer these questions monthly or weekly and set targets accordingly. Having a weekly target of expense will help you in managing the last few days of the month when most of the time we resort to Credit Cards. After deducting Savings and Needs portion, it is a good idea to uniformly divide the remainder into 4 or 5 weeks of the month.
Kakeibo journals generally have a space for annual planning where you can roughly estimate your yearly income and expenses. Here you can mention once a year expenses like car service, health-life-car insurance premium, property taxes, vacation, big purchases etc. (you might be having monthly/quarterly insurance premium payments but It is always cheaper to pay annual premiums if you can manage to pay in one go)
The most important aspect of kakeibo method is being Mindful while spending, You have to ask yourself following questions.
· Where to categorize this item? Can I survive without buying it?
· Can I afford it? Am I buying it because my neighbor has it?
· For how many days I will actually use it? How many days will I be proud of it or be happy with it? If the answer is positive, you need to put off the decision of buying the new dress, sunglasses or electronic gadget by at least a week, during this time you will be able to process your feelings and get clarity.
· Do I have space in my house/cupboard for it?
· From where did this thought came to my mind to buy this? Instagram/Facebook ads or while roaming around in the mall? (Pro Tip- always make a list while going for shopping and not being hungry while shopping)
Mindful spending does not mean cutting all the joy out of your life, it is about finding fruitful alternatives, if you shopped when you were bored or glum, you could lift up your spirits by buying a book or going to the gym etc. Basically, you have to identify and get out of the trigger environments.
You can color code- Red for wants/impulse buys/unexpected expenses, blue for Savings and Green for Needs. You can take out Bank/Credit card statements, for last 3 months and highlight them with these 3 colors to get a fair idea while deliberate planning of this month.
Kakeibo method tell you to write down every expense made as writing down as you go helps you keep an account as well as solidifies each event in your mind. The principle of write to remember/memorize that many of us followed for exams during school days applies here.
Another pro tip would be following the envelope method where in you have to withdraw cash from the ATM and distribute the money into 4 envelopes- Needs, Wants, Culture, Unexpected, so that as you spend cash, you can actually feel the envelope thinning down, forcing you to be careful while during the next expense. If spending in cash is not feasible then jotting down by hand all the digital payments you have made will make you solidify the event in your mind because digital payments do not let you associate fully with the act of spending. The money left at the end of the week can be put in savings envelope.
Kakeibo method can be used in synergy with the 50:30:20 method, which basically tells that you should spend 50% of your after-tax income on Needs, things absolutely essential to survive, next 30% to be spent on Wants, it is the stuff that is not essential but it is an expense that makes your day enjoyable, at the same time these activities have cheaper alternatives. The rest of 20% is to be saved for a specific goal. The kakeibo method will help to find out a proportion that is suitable to you since you would be recording each and every transaction and it will encourage you to increase the savings ratio by reducing the wants bucket and rationalizing the needs portion.
A penny saved is a penny earned but it is still just a penny, saving and making your savings work for you while you sleep is equally important.
“Saving is the gap between your ego and your income.” ― Morgan Housel, The Psychology of Money.